Rates on hold as RBA eyes recovery signs

The Reserve Bank has kept the cash rate at a record low, as improving economic data suggested its easing cycle could be drawing to a close.
By · 2 Oct 2013
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2 Oct 2013
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The Reserve Bank has kept the cash rate at a record low, as improving economic data suggested its easing cycle could be drawing to a close.

Even so, economists said the RBA appeared to indicate it was a "reluctant rate-cutter", and would be weighing the recent strength in the Australian dollar against the recovering property sector.

Yet the challenges brought about by a peak in mining investment, if met with an unexpected rise in the Australian dollar and weaker-than-expected third-quarter inflation data released later this month, could push the bank towards one more cut later this year or earlier in 2014, they said.

In a widely expected decision, the RBA on Tuesday left interest rates at 2.5 per cent for the second consecutive month, but gave little indication of its future policy intentions. The move came as the Australian share market fell slightly in choppy trading, after the United States government partially closed down because Congress failed to agree upon a new budget.

"The board judged that the setting of monetary policy remained appropriate," RBA governor Glenn Stevens said in a statement on Tuesday, echoing comments made after last month's meeting that were seen to shift the central bank towards a more neutral stance.

"The board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target."

The Australian dollar rose more than half a cent, from US93.40¢ to just under US94¢, following the statement. The currency was buying US94.21¢ late Tuesday.

The central bank's decision came as economic data released on Tuesday pointed to signs of a recovery in the manufacturing and retail sectors. Retail sales grew by a seasonally adjusted 0.4 per cent in August, surpassing economists' expectations of a 0.3 per cent rise, boosted by a 6.4 per cent jump in department store sales.

Activity in the manufacturing sector lifted for the first time in two years on the back of a falling Australian dollar and lower interest rates, with the Australian Industry Group's Performance of Manufacturing Index rising 5.3 points to 51.7 in September.

At the same time, capital city home values hit a new record high last month, led by Sydney, which grew 5.2 per cent. In contrast, prices slipped in Hobart by 3 per cent.

The RBA cautiously acknowledged the improving economic data and lifting sentiment, in an indication that it was "comfortably on hold in the near-term", ANZ's chief economist for Australia, Ivan Colhoun, said.

While the rapid rise in house prices has dominated headlines in recent days, Mr Stevens only briefly touched on the property sector, noting an increased demand in finance by households and a shift in savers' behaviour.

Mr Stevens added that "the easing in monetary policy since late 2011 has supported interest-sensitive spending and asset values" but that the full effects were "still coming through".

"Importantly, there was no upgrade to the bank's easing bias, which suggests a reduced likelihood of any further reduction in interest rates occurring before Christmas," Mr Colhoun said, adding that ANZ had shifted its last forecast of a rate cut to February 2014.

The Reserve Bank has jawboned in recent months about the need for a weaker exchange rate. Mr Stevens repeated the bank's stance in his statement, strengthening his wording by noting that a lower dollar "would assist" rather than "would have to foster" a rebalancing of the economy as it transits away from mining-led growth.

"We suspect that policymakers would prefer to see any further easing in monetary conditions come through a lower Australian dollar," Commonwealth Bank senior economist John Peters said.
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